Thursday, June 25, 2009

The emerging US system vs. the European system of financial services regulation

The Obama administration's proposals for financial system regulation have many important similarities and differences from the new European system.

For my comments on the US system as a whole, see my article(s) which should be published soon on the New York Times website.

The US system will have a purely advisory Council composed of all the Regulators, but the real power will lie with the Treasury and the Fed. By contrast, the European Systematic Risk Council (ESRC) will have as members all the EU central bank governors (chaired by the ECB president); all Treasury Departments and all regulators, even the powerful Financial Services Authority of the UK, will be left out in the cold.

Under the proposals, the US will receive a systemic risk assessment only once an year. The European Council is also to issue financial stability risk warnings, though their frequency is something I have not been to establish yet - the impression given is that warnings will be issued as when those are felt to be necessary; if so, this is a weakness in the system: it would be better to have the Council required to issue an assessment at regular and frequent intervals (weekly? monthly?), though they should have the additional power to issue a warning in the middle of the regular periodicity, if they feel it necessary.

In contrast to the U.S., however, EU central bankers will not oversee and regulate systemic cross-border institutions directly. This is another notable lacuna in the European system, as the ECB vice president Lorenzo Bini Smaghi noted in a speech he gave on June 19.

However, the European Council will provide macro-prudential recommendations for action to supervisors, as well as monitor their implementation. The US Council of Regulators, by contrast, will be merely a talking shop.

It is interesting that the US as well as Europe are privileging their Central Banks in the new system, even though it is clear that those Central Banks were complicit in the events that caused the crisis.

My own view of what should be done regarding systemic risk is different from both the European and the US view - and will be published soon, I hope, on the New York Times site. Sphere: Related Content

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